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For the sake of this question presume that my Roth 401K is invested in low-risk bonds paying prime rate.

Can I take a loan, put the money into a similarly low-risk investment paying the prime rate, then pay myself back at the prescribed rate (which is above prime) as a means to increase my 401K value?

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It would be bad tax-wise, because gains in the investment outside the 401k are taxed; whereas gains in the investment inside the 401k are not taxed.

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  • Perhaps, but something that's at prime rate and "risk-free" would likely be a government bond. Income on government bonds is tax exempt anyway.
    – Matthew
    Aug 26, 2014 at 15:24
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    @Matthew: Well if your investment gains are tax-exempt anyway, what's the point of "increasing your 401k value", since gains both inside and outside 401k are not taxed? Unless you want save up more value to invest in investments whose gains are not tax-exempt in the future.
    – user102008
    Aug 26, 2014 at 20:09
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If you can afford to put more money into the 401(k) -- which is what paying yourself back at a higher rate than you're earning would amount to -- why not just put more money into the 401(k)?

Or into an IRA, if you've maxed out what the 401(k) will allow.

That would seem to have the same positive effects you're looking for, while avoiding the negative ones.

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  • I contribute both my 401K and my IRA to the annual limit.
    – Matthew
    Aug 26, 2014 at 15:23
  • Excellent! I don't think this is going to push you past that limit, but I can't fault you for trying. (I'm not that efficient. I've got the 401(k) pretty much maxed, but my other savings are mostly ignoring tax issues.)
    – keshlam
    Aug 26, 2014 at 17:18

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